On 10 March 2020, the European Banking Authority (EBA) published an opinion on the treatment of credit insurance in the prudential framework. In the opinion the EBA calls for the implementation of the final Basel III framework as agreed by the Basel Committee on Banking Supervision. The opinion follows extensive feedback given in previous public consultations on draft guidelines on credit risk mitigation for institutions applying the internal ratings based approach with own estimates of loss given default (LGD).
The analysis in the opinion concludes that there should not be a specific value of regulatory LGD for credit insurance claims. While higher seniority typically applies to claims from insurance policies, due to the specific structure of the balance sheets of the insurance undertakings, most of the claims in the unwinding proceedings would benefit from such priority. As a result, in case of failure of an insurance company the insurance policy holders may still suffer from significant losses, especially in the conditions of economic downturn. In particular, there is no evidence that these losses would be significantly lower than the currently applicable regulatory LGD values.
The opinion points out that the final Basel III framework has been calibrated at the overall level and as such should be implemented in the EU in line with the international agreement. It is also stressed that specifying any preferential treatment for the claims on credit insurance policies would not be compliant with the final Basel III framework.